Dealpolitik: Silver Lake’s Silver-Lining Playbook

By Ronald Barusch

Blackstone and Carl Icahn have submitted proposals to try to take the buyout of Dell away from Michael Dell and Silver Lake Partners, who currently have a deal to buy Dell for $13.65 per share in cash, according to reports. Don’t count Michael Dell and Silver Lake out yet.

They remain in a strong position in a bidding contest even though their contractual “deal protections,” including a low break-up fee and limited matching rights, are weak. Here is how I see the Silver Lake buyout group’s hand and how it should play it.

Timing. Michael Dell has been working on this transaction since August. The financing for the deal has been committed since the merger agreement was signed up in early February. Moreover, the proxy statement for their deal is required to be filed by the end of next week. That puts the Silver Lake deal at least weeks, if not months, ahead of a deal with Blackstone or Icahn.

The timing advantage translates into a dollars and cents advantage for Silver Lake: Any tie in terms of value will go to Silver Lake and it may be able to even beat Blackstone or Icahn by paying less.

There are two reasons for this. First, Silver Lake and Mr. Dell will likely be able to deliver its deal faster to shareholders, so any cash in a Blackstone or Icahn deal will probably have to be discounted for the time value of money.

More importantly, because Silver Lake’s deal is closer to closing, the Dell independent committee is likely to see the Silver Lake deal as less risky than a competing deal.

To play on this, Silver Lake and Mr. Dell should insist on strict compliance with the timing provisions of the merger agreement by Dell. That requires filing of the merger proxy with the SEC within five business days of last Friday’s go shop deadline. In addition, Dell is required to respond to all SEC comments as promptly as practicable. Those comments should be received around 30 days after filing. At least theoretically it is possible to have the shareholder meeting on the Silver Lake/Dell deal around the end of June.

The faster Silver Lake can push its deal forward, the bigger its timing advantage if Blackstone or Icahn do firm up their offers.

Expect lots of arguments over the value of any stub. Normally cash is king in competitive bidding for a company. Some shareholders such as Southeastern Asset Management have been asking for a stub so current public holders can participate in any upside. But there’s also potential downside. Unlike a stub, cash is not risky and cannot decline in value after the deal closes.

Combine these factors with the timing advantage, and Silver Lake might not have to bump its bid by that much to beat competing deals, at least in the absence of further bidding.

Sit Tight for Now. Right now Silver Lake and Michael Dell’s best move is to do nothing on price. They will have a matching right if and when Blackstone or Icahn firm up their deals. Before Dell can terminate the merger agreement and take another bid, it must give four business days prior notice to Silver Lake of its intention to do so and give Silver Lake all the details of the topping bid. At that point, Dell’s special committee has an obligation to negotiate in good faith any revisions proposed by Silver Lake to make its deal be preferable. So unless and until that notice is given, there is no reason for Silver Lake to bump its price.

The Michael Dell Advantage. Much has been made (including by me) of the unusual lack of further matching rights if there is a second round of bidding. In other words, once Silver Lake and Mr. Dell have exercised their right to match once, Blackstone or Icahn could bump their bids and condition any such higher price on Dell immediately terminating the Silver Lake agreement. Once the Silver Lake deal is terminated and Dell has signed up with Blackstone or Icahn, Silver Lake would have the disadvantage of whatever deal protections Blackstone or Icahn insist upon in their deal, which could be substantial.

Although the lack of subsequent matching rights looks good on paper in terms of the flexibility for the independent committee, it may be less than meets the eye. That is because in connection with any bump in price in the negotiations of the first match, Silver Lake should try to insist on getting matching rights for subsequent bidding rounds.

Even if it doesn’t get a subsequent matching right, Silver Lake has another powerful weapon: Michael Dell. He is on the board. Under Delaware corporate law, a board committee cannot approve a merger agreement on its own. Mergers require a vote by the full board. Thus, at any board meeting to approve a Blackstone or Icahn deal, Michael Dell will have a last look and can rebid real time in the board meeting even though his group does not have a contractual matching right. It might seem like an unfair advantage, but at that meeting the board will be focused on getting the best deal.

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Unless Silver Lake has lost its enthusiasm for Dell, or Michael Dell supports one of the competing bids, Blackstone and Icahn have a lot of work to do to beat Silver Lake.

Comments (1 of 1)

why would michael be allowed in the board meeting you refer to. I would think he would be excluded as conflicted by a board vote from the rest of the board from participating in the discussion or voting.

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